How is it possible that in perfect competition some firms have economic profits equal to zero while others have a positive economic profit. Can they have a positive consumer surplus? Isn\'t it a contradiction?
Solution
Economic Profit = Revenue-Opportunity cost
Economic profit equals total revenue minus total cost, where cost is measured in the economic sense as opportunity cost.
Opportunity cost is not constant across the firm. A firm with lower cost of capital than industry average will have lower opportunity cost than industry average. Thus give a constant price or constant revenue a firm with lower opportunity cost might earn economic profit .A lower cost of capital (opportunity cost) might be achieved through economies of scale etc.
Since the demand curve is horizontal and the firms are price takers. Thus, the price is given. At that given price, we assume that consumers are willing to pay for all of the quantity firms producing. Thus they can
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How is it possible that in perfect competition some firms have economi.docx
1. How is it possible that in perfect competition some firms have economic profits equal to zero
while others have a positive economic profit. Can they have a positive consumer surplus? Isn't it
a contradiction?
Solution
Economic Profit = Revenue-Opportunity cost
Economic profit equals total revenue minus total cost, where cost is measured in the economic
sense as opportunity cost.
Opportunity cost is not constant across the firm. A firm with lower cost of capital than industry
average will have lower opportunity cost than industry average. Thus give a constant price or
constant revenue a firm with lower opportunity cost might earn economic profit .A lower cost of
capital (opportunity cost) might be achieved through economies of scale etc.
Since the demand curve is horizontal and the firms are price takers. Thus, the price is given. At
that given price, we assume that consumers are willing to pay for all of the quantity firms
producing. Thus they can
